The TV business channel 24/7 crowd have more or less lapsed into sullen quietude over the continuing fall in the price of the oil commodity. Why? They can’t explain it in terms that they are willing to accept.
Some of the anchors are restive and asking embarrassing questions that are "slapped down" as quickly as they arise.
The rise of the dollar, the destruction of US demand, the unexpected decline of Asian demand, etc., etc., ad nauseam. These are the "herd" answers.
In fact, there was never really a short term shortage of petroleum. The talking heads and the mindless anchors on TV business shows hyped and hyped the long term shortages until the unthinking came to believe in oil shortages as every day fact. Talib, in "The Black Swan" describes this phenomenon. Once something like the phony oil shortage became "fact" then the oil commodity was a good candidate for the "play" of traders of the wild eyed variety. Now, they are getting out. This reveals the lack of "fundamentals" underneath todays prices.
A woman "talking head" on CNBC said today that oil is seeking an "equilibrium price" based on the real supply and demand situation. She was correct.
She was hooted down.
We all know that Social Security is going to run out of oil & there won’t be enough of it when I retire.
It is also nearing the end of summer driving season. Every summer demand increases, as does the price.
Col: Doesn’t the drop in price even while Georgia burns, further support your thesis?
A similar phenomenon is occurring with “expert” opinion on the Georgian situation. They’re all willing to talk about ethnic tensions, wounded Russian pride, Russian ingratitude towards the West, etc. And about how Washington will certainly be tough on Moscow, denying access to its privileged little club.
Intentionally lost in the coversation is the fact that Georgia is the only transit route for Caspian oil and gas to the West besides Russia. And now the United States proved itself incapable of defending that route.
Expert opinion could not bring itself to discuss that or its long term consequences–it’s just too embarrassing to the powers that be. And it bodes poorly for the US position in the world, which depends largely on Washington’s ability to provide an oil protection service for Europe and Japan. (Meanwhile European leaders have been noticeably circumspect about condemning Russia–they know which side of their bread is greased and who greases it.)
Meanwhile, the price of oil continues to drop, despite the fact that the BTC pipeline, carrying over 1% of world oil supply, got bombed in eastern Turkey last week and is out of commission for a couple weeks. A month ago, such news would have sent oil prices well over $150 per barrel.
So, Pat, you’re not joining in the din for off-shore drilling?
If any good has come from this, it would appear to be diminished use of petroleum and increased use of mass transit.
Here’s an interesting article on the importing and exporting of refined petroleum products by US oil companies. Apparently, the volume of refined products shipped out of the US has dramatically increased over the past 8 months. We are led to believe that the reason for our high gas prices are shortages, hence the Drill Here! Drill Now! mantra.
You are having way too much fun being correct on this topic!
And as a veteran of the last time this kind of market shenanighans was played on a broad section of the American electorate (in California, via rigged electricity and natural gas markets circa 2001), I am vicariously loving every minute of your well-earned glee!
Leveraged hot money ricocheting from trade to trade.
Hedge funds. Quant books. Prop desks. The “financial economy” on dislocation watch!
John Cassidy brings up a similar point about the complete lack of transparency about supply and demand: the saudis won’t let anyone check their claims, and several of the BRIC countries aren’t helpful with consumption data. We do know that India and China have both diminished their subsidies for gasoline, so that should hurt demand, and our own consumption has gone down dramatically (demand destruction, or the solution to high prices is high prices). OTOH, go to oildrum.com and you’ll meet a lot of very smart people who are bullish long term on oil.
But i am surprised that you continue to pick on this topic. A cure would be to stop watching those 24/7 media buffoons, cause there is little info in that “infotainment” but a whole lot of irritation.
Look for dramatic Chinese international energy activity post-Olympics. Seeing Russian efforts to make energy the key national security linchpin Chinese will take self-protective steps. The Russians are really thinking 5-10 years out and the Chinese 50-100.
For some nice botanical illustrations of the Semper Augustus tulip:
“A Rosen, with blood-red flares or flames vividly streaked on a white ground, and flakes and flashes of the same color at the pedals’ edge, Semper Augustus was, by all accounts, an extraordinary flower, and one celebrated at the time for its beauty and rarity. Because Semper Augustus was scarce, it was coveted and because it was desirable, it was expensive (indeed, by the time the market collapsed, the number of bulbs probably never was much greater than it had been originally). This rarity was reflected in the price. In 1623, one bulb was sold for a thousand guilders. Even then, the owner felt cheated when it was discovered that there were two offsets when lifted from the ground. The next year, only a dozen examples was said to exist, each of which could have sold for 1,200 guilders and all owned by an anonymous individual who refused to part with them, realizing that the price would fall if he did not control the market. The following year, 2,000 and then 3,000 guilders were offered for a single bulb but the owner still could not make up his mind, not wanting to increase the supply of such a rare bulb and appreciating that even more might be realized if he waited.
In 1633, one Semper Augustus was said to have sold for 5,500 guilders, and in 1637, just before the crash, a price of 10,000 guilders was asked, an exorbitant amount that would have purchased a grand home on the most fashionable canal in Amsterdam.”
I still haven’t heard a convincing method by which speculators control the price of oil and then all decide to profit at the same time. The argument that increasing demand for a universally vital commodity with no viable substitute and inelastic supply could lead to these wide price swings seems more plausible to me by far. Perhaps hording by not pumping is a method of manipulation, but I’m sure those that have it are getting it to market as fast as they can at these prices. I’d be willing to attribute some price appreciation to hot money looking for a home in absence of totally safe triple A rated mortgage backed securities leveraged 200 times for juice and certainly give a little to perceived risk from geopolitical factors, but ignoring the demand side of the equation for vague references to smartly dressed commodity trading sharks is a stretch.
Correlation is not necessarily causation.
Let’s see, things Iran can help with:
-Georgia/Russia conflict via providing a gas and oil pipeline route circumventing Georgia, Russia, check
Unfortunately, our allies, the Israelis stand in the way. How unfortunate.
I guess I have to place myself among the herd.
Speculators increase the volatility of a commodity like oil. They have no impact at all upon its long term price. The price of oil is set by its producers and consumers.
The cost of carry for oil is too much for any speculator to adopt a buy and hold strategy. If a speculator buys oil the only thing he can do with it is….sell it. Whatever increase in price he caused by buying is exactly offset by selling.
Not so for consumers. Any oil they buy is taken off the market forever.
This does not mean oil always has to go up in price. If there is a recession there are fewer consumers and the price will go down.
I can only guess where the price of oil is headed. If I predicted a year ago that oil would be above 110…and that people would be **happy** about it I’d have seemd crazy.
So I will go ahead and say within 2 years oil will be above 175 and people will be happy its under 200.
Lysander and Pitch
Neither one of you is addressing my point. The recent run up the hill and current run down the hill in oil prices has nothing to do with an equilibrium price for the commodity.
It has been altogether a game played in the financial markets by investors who have no interest whatever in the commodity, only in the price.
The vast funds controlled by the players (fund managers, etc.) drive the price by bidding it up or by pulling the money out of the game.
This is neither “manipulation” nor “control” in the sense of some conspiratorial activity. pl
If you did the math, you’d probably find that the price of oil correlated most closely with the amount of airtime Dick Cheney is currently receiving, and the volume of the crockery being broken in the background.
And this week it looks like the lid might stay on the Middle East. so the pressure on oil prices eases – momentarily.
I think the confusion about this is that demand is not the same as consumption.
Speculators neither add to the supply nor the consumption of oil or tulips. So they cannot affect the long-term price of oil or tulips. However, speculation does affect the demand for oil and it is supply/demand and not supply/consumption that sets the immediate (short-term) price.
The US hit peak production in 1970, and has been in steep decline since then. No mythical Alaskan or off-shore site will change this fact.
GB, Mexico, and Norway are past peak production and in steep decline. Seems the average oil field lasts about 40 years. Saudi Arabia is the outlier here but even the great Ghawar oil field will hit peak if it hasn’t already. “Drill, drill, drill” ideology will not change these facts.
China’s increase in demand for oil is at six percent per year. The highest year for world production was 2005. I’m not saying the world will not produce more than the 2005 figure but I doubt it will vary a great deal from that figure.
In the long term demand is increasing much faster than supply and price will increase accordingly.
Wanna bet what the price will be six months from today? pl
“It has been altogether a game played in the financial markets by investors who have no interest whatever in the commodity, only in the price.” – PL
I would also add the price trend and momentum of price change. Another that I would add is price trend of other markets. As we have seen in the recent past sometimes fund managers have to exit profitable trades to pony up for margin calls in others.
Since there are a large number of leveraged “quant” funds that are really momentum traders there is significant “herding”. Notice the volatility in the FX and precious metals markets in the past 2 weeks.
Wanna bet what the price of oil will be six years from now?
Interesting article on the correlation of feet drilled to oil production in the US:
You still seem to imply that I am a fool who can’t tell the difference between short term market action by financial traders and the long term supply and demand crisis.
I have no idea what the price will be in five years other than that it will be high.
Did you answer my question? PL
When I want a suggestion for a cure, I will ask for one. pl
Pat, You are in the group of the last people I would think a fool. Your knowledge and analytical abilities in matters cultural,strategic and tactical is immense.
Your posts I’ve read about oil focuses on the short term. I’m glad you seem to recognize the long term (could be medium term, 5-10 years) problems with oil, more would be welcome by this reader.
If your question is where will oil prices be six months from now the answer is lower, barring a bone-head move by Israel or Bush. That “good” news will be outweighed by where the US economy will probably be at this time. Demand destruction is the short term downward pressure on oil because of probable worldwide recession.
The demand and supply trends are the evidence for sharply higher prices in the future.
As the price of oil plummeted, gold lease rates apparently went negative. Very unusual, at least to me. I am trying to make some sense of it all, so here’s some speculation about the world of speculators: oil bubble bursts. Central banks want to insure that proceeds from recent oil sales go not into precious metal assets, particularly gold, but into the USD. So gold lease rates go negative. More gold hits the market and the price of gold drops precipitously. USD increases against other currencies. Helps fight inflation, perhaps.
thought your readers might enjoy knowing that the billionaire hedge fundster t. boone pickens is at it trying his billionaire game of having the working people/tax payers pay for his billionaire toys (wind energy/natural gas boonedoggles). now t. boone is in bed with pelosi and george soros.
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